Service charges

The new strata law, officially know as 'The Condominium Law No. 27 of 2007 Regarding Ownership of Jointly Owned Property in the Emirate of Dubai', takes effect from 1 April 2008. We take a brief look at how it changes service charges and the effect it will have on developers.

Peter Crogan
Peter Crogan

The new strata law, officially know as 'The Condominium Law No. 27 of 2007 Regarding Ownership of Jointly Owned Property in the Emirate of Dubai', takes effect from 1 April 2008. We take a brief look at how it changes service charges and the effect it will have on developers.

The law will provide legal mechanisms for the transition of jointly held property from the developer to the owners, as well as regulations that will ensure the ongoing maintenance of the owner's investment in that asset.

Service charges could increase in some areas.

In accordance with Article No. 21 (1) of the Jointly Owned Property Law, owner's, through the establishment of an owners association, will take responsibility for the management of their own buildings and communities including all common property.

In addition to funding the day-to-day maintenance requirements of an owners association, the law will also make the provisioning for the long term maintenance of the buildings and common property mandatory, by the introduction of a sinking fund or capital improvement fund.

This is a fund in which owners will be required to contribute by way of an additional service charge, to ensure that sufficient capital is raised in the long term to allow for necessary major works and replacements.

Current service charges

In those communities where an owners association already exists, the service charge calculation usually only covers the day-to-day expenses of the community or building with no provision for capital improvement and maintenance funding.

These service charges were calculated at the time of signing PSA (purchase sale agreements) contracts a number of years ago when the requirements of the new law were not in existence. These owners associations will see an increase in their service charges in line with the requirements of the new law.

In the past it has also been a practice of some developers to deliberately subsidise the service charges to attract buyers into their developments. These owners will be disappointed when they realise that the costs of running their community is much more than they have come accustomed to paying.

Determination of service charges post implementation

The service charges will be determined at an annual general meeting of the owners association after being determined by a management board consisting of representatives from the owners and a general manager who will act on behalf of the management board. Owners will be required to fund two separate funds for the management of their building or community.

The administrative fund will cover the following expense categories:

  •  Auditing of financial accounts;
  •  Bank account fees;
  • DEWA common area charges;
  • Insurance premiums;
  • Common property repairs and maintenance charges;
  • Garden and grounds maintenance;
  •  Window and common area cleaning;
  • MEP charges and other facilities management charges;
  • Fire protection costs;
  •  Owners association management fees and,
  • Local municipality charges.

The sinking fund or capital improvement fund is for long term provisioning of funds for protection of the capital asset being the building, its common areas and any improvements.

The forecasting for this fund is usually completed by a building quantity surveyor who has knowledge of building materials and their maintenance life cycles. The fund provides for capital expenditure maintenance and replacement items such as:

  • Painting of internal common areas and external surfaces;
  •  Pool and spa resurfacing;
  •  MEP replacements and upgrades;
  •  Upgrade of fire protection equipment;
  •  Pump and pool equipment replacement;
  •  Replacement of furniture and fittings;
  •  Replacement and or upgrade of access security gates & fences.

Contractor transparency

As owners associations gain control of the budgeting processes, all contractors will tender for contracts and the introduction of competition amongst service providers will be a good thing for owners. In some instances the administrative fund budgets could decrease.

How is an owner's share of the service charge calculated?

The strata law has determined that an owner's proportionate share must be based on the respective areas of the units. The unit area is usually expressed as a percentage of the unit area over the total area of the site plan, excepting those areas that are part of the plot and are being reserved for future development. This figure must be a whole number.

The 'owners share' not only determines what proportion of the administrative and sinking fund budget the unit owner is obliged to pay but also is the basis for calculating:

  • The value of the unit owners vote at general meetings;
  •  The basis for determining the unit owners share of the common property;
  • The determination of the unit owners share of a split of surplus assets if approved at a general meeting and,
  •  Each owner's share of any rates or charges levied by the local municipality charges, (if applicable).

For example: If the size of the unit is 1,000ft2 and the total area of the developed site plan is 100,000ft2 then the proportionate share for this unit will be 1,000/100,000 or 1/1000.

This unit will contribute 1/1000 th's of the annual administrative fund budget for the management of the common property as determined by the owners association. The unit will also contribute 1/1,000 th's to the annual sinking fund budget as determined by the owner association. On termination of the site plan then that owner will receive 1/1,000 th's of the value realisation.

If there are a number of co-owners of a unit any co-owner may vote, but the unit has one vote per unit.

 

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